Are the Bears Getting Ready to Party?

Let’s start with sentiment because yesterday, I noted that I didn’t think sentiment had changed very much after the whack. I do believe had the market returned to its upside ways on Thursday and held on we would have seen the complacency shoot right back.

But as the market leaked in the afternoon, I saw something more nuanced. Maybe we should say folks began doing more dancing. Instead of being outright bullish, there was a lot more commentary such as, well you know we had gotten quite frothy in the last few weeks. Naturally none of them told us about the froth in advance.

So I would not call them bearish, but as I like to say, the bulls were partying in the backyard a week ago while their neighbors, the bears, were rather lonely and glum in their backyard. Now, the bulls have edged ever so slightly toward the bears’ fence, peering over to see if the fun is over there now. They have not gone over to the bears’ yard yet, though.

We see it in the put/call ratio which pushed up to 1.05 on Thursday, the highest reading since before the election. So that’s a minor change. If we plug that 1.05 reading into the ten-day moving average, we can see an actual tick-up, the first in nearly a month. A high reading in this moving average tells me those bulls have jumped the fence to the bear camp. The chart as it is now says they are edging over to the fence.

Another thing that changed on Thursday, stocks like QUBT collapsed as it was down 40%. That is the speculation finally coming out of the market. You might recall, about a month ago I highlighted a WSJ article that talked about a young Harvard graduate who had put his parents’ money into different forms of MSTR. He bought MSTR outright and the 2x MSTR ETF for them. That stock is now down 40%. Yes I feel for his parents but that’s how bubbles burst. They rarely resolve by going sideways.

Elsewhere there wasn’t much change in the oversold condition. For example, the ‘what if’ for the McClellan Summation Index still stands at +5200. That’s when you know we’re oversold, when a down day doesn’t make it any worse.

If I plug in lower closes for the Russell 2000 for the next week we can see the Momentum Indicator turns up. It turns up the day before Christmas. As a reminder, the Santa Rally technically begins around two days before Christmas.

Also please keep in mind this is not meant to find the exact day but a general time frame.

I will do a full review of the intermediate-term indicators next week (last time we looked they were mixed at best, mostly still overbought). The one I would highlight today is the Volume Indicator because it is now at 46%. It’s hard to tell on the chart, but it was last this low as we headed into that small cap surge in early July.

But know that it is now pushing into oversold territory, the first of my intermediate term indicators to do so.

Finally, there are the bonds. The Daily Sentiment Index (DSI) is single digits, for the first time since October 2023 as it stands at 9. The Dollar Index which everyone seems to have discovered in the last two days is at 89. So the buck and the bonds are getting quite extreme.

I still think we should look for a Santa Rally next week.